Houston’s unemployment rate rose from 4.2 percent in December 2007 to 5.5 percent (preliminary) by December 2008, but looked attractive compared to the nationwide rise from 4.8 to 7.1 percent in the same period (which now temporarily sits at 8.9 percent in a probable upward trajectory).

While the job market up until now has been a positive point in the Houston economy, the brunt of restricted lending and a substantial rise in foreclosure activity have combined to slow housing sales and are now impacting prices.

The average number of homes sold per month in January 2002 was 4,540 and tallied 5,340 in January 2009—an increase of approximately 2.5 percent per year. Job growth in the same period averaged almost two percent per year. But that is not the full story. The story is not that the number of sales grew an average of 2.5 percent per year in the seven-year interval, but rather that within that seven-year period, sales jumped to an astounding and unsustainable 6,800 per month in February 2008 (27 percent greater than the current rate). The graph shows the average number of sales per month for the prior 12 months—hence it removes the seasonality of sales activity. While an argument could be made that the current sales rate is close to normal, the high sales numbers seen since 2004 were abnormal and a result of a high job-growth economy and easy financing. Simply stated, cheap, readily-available financing and a hot economy produced housing sales at a pace that is not sustainable in the long run.  

While the perception is that Houston is a fiscally conservative city, the reality is that during the boom period of exotic residential financing, Houston over-indulged. The National Association of REALTORS® reported that, while subprime loans made up 10.1 of all residential loans nationwide in the first quarter of 2006, more than 17 percent of lending in Houston was subprime at that time. The disappearance of minimal qualifying lending requirements and greater-than-normal use of non-conventional loan types (subprime, alt A, and other exotic adjustable rate loans) in the period from 2004 to 2007, and the current inability to refinance those properties due to increased qualifying requirements, has seen foreclosures explode in Houston.  

One in three existing Houston home sales (34 percent) in January 2009 had been through foreclosure, as reported by the Houston Association of REALTORS®. All this is reflected in price pressure, with the median Houston price declining from $139,500 in January 2008 to $129,700 by January 2009 (a reduction of seven percent).

Houston’s new residential building permits on an annualized basis peaked at 65,000 new dwelling units in 2006—retreating to 38,800 (preliminary) in 2008—a 40 percent decline. While the reduction sounds substantial, examine the number of new dwelling units in face of job changes. Job growth was 17,200 in the prior 12 months, resulting in less than one-half a new job per new dwelling unit. Markets that are more in balance (or as economists say, “in equilibrium”) typically have 1.25 to 1.5 new jobs per new dwelling. So while residential construction has fallen 40 percent, based on the number of new jobs created, the number of new residential dwelling units was almost three times greater than needed.

The good news is that Houston continues to avoid the economic and housing sickness plaguing much of the U.S. The bad news is that we are now showing some of the symptoms seen elsewhere in recent years.

Bottom line: Even record low interest rates are not going to save the Houston housing market from further woes. But we still are better than most of the country. Sniffles and a light fever—but not pneumonia. At least for now.